catastrophe bond

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Catastrophe bond

Also known as cat bonds, these are used as a way for insurance agents to transfer risks to investors. They are often attractive to investors because the risks (like that of an earthquake) are uncorrelated with the business cycle – and, hence, provide natural diversification.

Catastrophe Bond

A high-yield debt security backed by insurance premiums. Insurance companies issue catastrophe bonds in order to raise funds for hypothetical insurance payouts resulting from one or more stated events such as floods or fires. The bondholder receives coupons from what the insurance company collects in premiums. However, if the insurance company suffers a loss from a payout of one of stated events, the obligation to repay the bond is either relaxed or forgiven. The main advantage to a catastrophe bond, despite the stated risk, is the fact that it offers a high yield without much regard for the performance of the broader economy because people and institutions will almost always set money aside for insurance premiums.

catastrophe bond

A debt security with a payoff tied to the relative severity of a natural disaster such as a hurricane or earthquake. Bondholders are paid with insurance premiums but may have to accept reduced principal repayment in the event the specified disaster occurs during the life of the bond.
References in periodicals archive ?
Feig has returned to the firm's Capital Markets group in New York to continue his practice in risk-linked securities and structured and corporate finance, with particular emphasis on catastrophe bonds, cell tower transactions and other off-the-run asset classes.
The activity followed one of the slowest third quarters since the P&C catastrophe bonds were first issued in the mid-1990s, according to a new briefing and analysis by GC Securities, a division of MMC Securities Corp.
Catastrophe bonds feature full collateralization of the underlying risk transfer and thus abandon the reinsurance principle of economizing on collateral through diversification of risk transfer.
Catastrophe bonds pay interest like conventional bonds during normal times, but convert to equity during contractually specified stressful times like those experienced during the fall of 2008.
The data does not point to a lack of faith in hurricane prediction, but rather to the increased interest in catastrophe bonds as a method of risk transfer.
The ILS Indices track the performance of catastrophe bonds in each of four portfolios: All Bond, BB-rated Bond, U.
Catastrophe bonds, used by investors to bet against natural disasters, had as of the second week in September advanced for a record 10th straight week on fewer storms in the United States and improved capital markets.
Entitled Cat Bond Update: First Quarter 2009, the report indicated that catastrophe bonds continued to be important tools for risk and capital managers, with three bonds coming to market in the first quarter of 2009, totaling $575 million in fresh capital.
Catastrophe bonds, while inline with the type of innovative, capacity building solution the Treasury Department called for, are a less realistic and unproven solution DePoy said.
Some insurers and reinsurers benefit from catastrophe bonds because the bonds diversify their funding base for catastrophic risk.